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Good Year For Green

A year that starts off with line-ups at the legal marijuana store has got to be a good year for green in general.

Old timers, who took their first toke some 50 years ago, wistfully watch the TV news about the opening of legal pot shops in Colorado. They see happy customers being interviewed. The marijuana buyers are proud, talking about framing the receipts for their first legal pot purchase. The old timers wonder, perhaps wiping away a small tear remembering foggy youth, what took them so long to legalize and tax cannabis?

They rock back and forth in their chair and rant squeakily at the TV - “Why I’ll bet every state outside maybe Alabama, Mississippi and Texas will legalize pot in the next few years. Dummies should have done it years ago”

Perhaps investors unable to buy into the burgeoning marijuana boom, are looking to the next best green alternative. The same heady atmosphere permeating the opening day line-ups at pot shops in Colorado appeared to be wafting through the market for renewable energy stocks. For some reason, investors are catching on that green is good.

Renewable energy stocks were quick out of the gate as soon as trading started in 2014. Even clean energy sectors that have been dormant for some time, like the fuel cell stocks, put the pedal to the metal at the beginning of this new year.

Until the sell-off of the past few days, renewable energy stocks were stronger than the stock market as a whole in the first trading days of January. Then the polar vortex hit the markets last week and investors got cold feet about emerging economies, currencies and stocks in general. Renewable energy stocks gave back some of their gains.

As an example, on Jan. 16, Jinko Solar closed a deal to sell 3.75 million American Depository Shares - ADS’s – at a price of $35.35 in a secondary offering. Friday that same ADS closed at $29.70 a drop of 16% in a week.

Wherever the correction takes the market, green, as in growth, is good. And that is the likely key to the renewed interest in the renewable energy sector. JP Morgan predicts that shipments of solar photovoltaic equipment in 2014 will increase 30% over 2013 levels to a total of 53 Gigawatts worldwide. That’s a hell of a lot of solar panels.

While solar energy is definitely hot, it is not the only growth business in renewable energy. For example, wind power capacity in Ontario has doubled in the past five years. In England, installed wind turbine capacity increased from 6.86 Gigawatts at the end of 2012 to 9.1 Gigawatts at the end of 2013 – a 41% increase in just one year.

Costs of renewable energy equipment continue to drop as efficiency and reliability continue to increase - a virtuous circle that bodes well for the future. Experience with utility scale renewable energy facilities is making financing more predictable for money managers. So as time goes on, capital is easier to obtain.

It’s not hard to understand why the money has been flowing. Capital costs up front for renewable energy projects are high, but amortization periods are now well understood. And ongoing production costs are low and predictable – there are no fuel costs.

After widespread use started in the 1960’s it took decades to finally arrive at the legalization of marijuana. Renewable energy will take decades to replace competing forms of energy. And it will be a much bigger business than pot.

After many months of advancing, stock markets worldwide have finally taken a serious hit this past week. Selling momentum may crank up in the days ahead as some hard economic realities sink in. When the selling tapers, there will be some bargains in renewable energy stocks. This is a long term trend.

I am continuing with the review of companies I’ve written about in the past.

Real Goods Solar

Real Goods claims to have made the first commercial sale of a solar panel in the US in 1978. The company doesn’t manufacture solar panels, inverters, or other equipment. Rather, Real Goods sells and installs solar power systems in a number of states in the US.

Being an installer, not a manufacturer, means that Real Goods has benefitted from falling solar module prices. Lower component prices make solar power cost-effective for more residential and commercial applications. The result is that business is growing. Fast.

Real Goods has undergone a number of changes in the past couple of years. Management has changed – a more corporate group of officers. The company has grown through acquisitions, buying a couple of large solar installers in different locations in the US.

These acquisitions helped Real Goods to diversify the business geographically and attain better economies of scale. Solar panels are a commodity business and if your company can order higher amounts than your competitors, manufacturers will give you a better price.

SolarCity has become a gigantic player in the residential solar market by coming up with a new financing model for solar power systems – leasing. SolarCity’s stock has been a big winner. Real Goods is working on becoming bigger by amalgamating installers – it’s still a fragmented business.

What’s more, Real Goods teams up with different partners, like SunRun to provide financing of all types, including the leasing model made popular by SolarCity.

Real Goods Solar 2 Year Chart: Source - Bigcharts.com

Real Goods’ stock was trading at $1.37 when I first wrote about it in December of 2011. After a big drop on Friday, it closed at $3.61. I have traded in and out of the stock, taking some profits and buying back on dips. Now I hold shares in the company. The capitalization is still small and it appears to me that Real Goods wants to get bigger.

SilverCrest Mines

Renewable energy needs silver because it is the best conductor of electricity. So silver is used in the manufacture of solar panels – to transmit electricity through the panels. One hundred million ounces of silver a year are now being used in solar panels.

SilverCrest is a silver miner in Mexico. Its Santa Elena mine in the state of Sonora is producing over 2 million ounces of silver equivalent a year (silver and gold) The company brought this mine into production in the past few years on budget, and on schedule.

SilverCrest is exploring under and around the open pit of the mine and continues to find viable mineralization. SilverCrest is working on feasibility studies to increase production and mine life at Santa Elena.

Meanwhile SilverCrest is working on other projects. The Cruz de Mayo project is 35 kilometres from Santa Elena. If this project is developed, some of the higher grade ore could be shipped to Santa Elena for processing.

The company’s La Jolla project in Durango is a silver, gold and copper deposit. A preliminary economic assessment shows that the project has good potential.

SilverCrest has made a lot of good moves in its growth to silver producer. The investment community has faith in management, and there is good reason to believe the company will continue to grow. Even with the drop in silver and gold prices of the past couple of years, SilverCrest has been generating money. Cash flow in the first 9 months of 2013 was 20 cents Can. a share and profit per share was 11 cents.

The stock was trading at $2.18 when I first wrote about the company in April of 2013. It closed Friday at exactly the same price - $2.18. Considering the bloodbath in mining shares during the past year, the relative strength of SilverCrest is impressive.

I have owned shares in the company for a few years and continue to hold them, in the hope of higher silver prices and more success for the company going forward.

SQM produces a number of useful industrial minerals such as iodine, used in paints and as a food supplement, and potassium used in fertilizers. The product that SQM produces that is most useful for renewable energy is lithium. SQM has been producing lithium from brines since 1996 and is the leading producer of lithium in the world.

SQM currently produces about 35% of the world’s lithium.

This is a big company with annual sales of about $2.4 billion US and offices in 20 countries. Lithium is not the biggest component of the company’s revenues or profits. Lithium accounted for only about 11% of SQM’s profits in 2013. Still this aspect of the company’s business is growing fast. Global demand for lithium is growing about 8% per year.

SQM’s stock was hit hard in late July of 2013 when the potash cartel began unravelling in eastern Europe. Potash is a big money maker for SQM. The company has doubled its production of Potash since 2008 and the threat of lower prices in the future pushed the stock down to lows it hadn’t seen since 2009.

Gross profits for the first 9 months of 2013 were down 28% from the previous year. Still, the company made 53 cents per share in profits for the first 9 months. EBITDA was about $1 billion. SQM has a rock solid balance sheet with about $1.7 billion in working capital. The company has lots of money to withstand a downturn and/or grow the business.

When I first wrote about SQM in September of last year, the stock was $31.66. It has dropped back to Friday’s close of $26.40. I hold the shares of SQM that I’ve purchased and may add to the position if there is continued weakness.

SunPower Corp.

SunPower is a large US based manufacturer of solar panels. The company has been in business since 1985 – a pioneer in solar energy. In 2011, Total, the French oil and gas giant, bought a 60% stake in SunPower.

The company has been a technological leader. SunPower claims to produce the most efficient and reliable solar panels. Its Maxeon solar cell is the highest efficiency commercially available solar cell, the E20 model was the first module to achieve a 20% efficiency in converting sunlight into electricity.

But when Chinese manufactured solar modules began to take over the market in recent years with low priced, high powered solar panels, SunPower had to look for a new business model to keep its factories humming. SunPower began to permit, engineer, and construct its own utility scale solar projects, using panels the company manufactures.

Once the solar farms are in construction, or up and running, SunPower finds a power producing company to buy the project, and then moves on to build the next one. Having a giant company like Total as the majority owner makes obtaining financing for these projects easier and terms better for SunPower.

The company’s 579 Megawatt Solar Star project in southern California is now being hooked up to the grid. This gigantic solar farm has 1.7 million SunPower solar panels spread over 3200 acres. SunPower built the project and then sold it to MidAmerican Energy – a Berkshire Hathaway company.

The stock was $4.70 when I wrote about it in September 2012. I sold my SunPower position in 2013, taking profits. Recently I started buying back in and will buy more on weakness.

US Geothermal

On January 13, US Geothermal issued an update. The company now has three operating geothermal power plants in the western US – one in Idaho, one in Nevada and one in Oregon. The Neal Hot Springs plant in Oregon – the company’s largest – has been commissioned recently.

All three plants were operating at well over 90% availability in the last quarter. Based on numbers from the operational update, revenues from operations in the quarter ending December should be about $9.5 million US –the best numbers that US Geothermal has shown to date. US Geothermal is showing that the company can generate healthy revenues from its geothermal plants. These revenues, assuming there are no production glitches, should be a continuing source of capital as the company grows.

The first direction for US Geothermal’s growth will be outside the US. The company has been drilling at the El Ceibillo project, a few miles outside Guatemala City, and coming up with higher than expected temperatures at depth – a good sign for future production.

The El Ceibillo project has environmental production permits from the Guatemalan government for a 25 Megawatt plant at the site.

US Geothermal has only 101 million shares outstanding and a market capitalization of just under $50 million at Friday’s closing price of 49 cents per share.

The company will have to prove that it can be a steady producer of electricity and money. After an earnings release or two with positive news, the stock should begin to reflect the value of the company’s assets.

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